Development aid rose to a new record in 2008. While good news in a crisis, how can the trend be maintained ?

In 2008, total net official development assistance (ODA) from OECD Development Assistance Committee (DAC) countries rose by 10.2% in real terms to US$119.8 billion. This is the highest annual aid figure ever recorded, representing 0.3% of members’ combined gross national income.

This encouraging, if rather unexpected, news comes despite the fact that the global economic crisis began to bite early in 2008. Since debt relief was also coming to an end for some recipient countries, a technical fall in aid would not have been a complete surprise. Still, there is no room for complacency. On the contrary, there are signs that the crisis is now forcing developed countries into difficult budgetary choices and foreign aid could be a victim.

The global economic crisis is already placing pressure on the world’s most vulnerable populations who, after being hit by food and fuel price hikes in early 2008, now face fallout from much softer prices and a slump in world trade. Risks will quickly loom if donor countries do not honour their aid commitments.

To prevent this from happening, OECD Secretary-General Angel Gurría and Eckhard Deutscher, the Chair of OECD’s Development Assistance Committee, have called on donor countries to stand by their aid pledges.

“Let us not repeat the mistakes we made following the recession of the early 1990s when many OECD governments let aid efforts decline, with the consequent impacts on developing countries in such areas as agricultural production, infrastructure, social welfare and political stability”, they warned.

Countries should heed these warnings, even though aid programming indicates some further modest increases for 2009 and 2010. Today, the situation remains most critical in Africa where recent advances are fragile. Indeed, previous OECD forecasts for the continent are being revised down sharply.

OECD has warned, however, that oil-rich African countries could not continue to rely on high commodity prices and would have to act by tackling corruption and diversifying their economies. Within a six-month period oil prices plummeted. Other international organisations are also calling for commitments to be stepped up, and Africa has been a particular focus of attention, as shocks from the financial crisis ripple towards the troubled continent.

“Even though the crisis has been slow in reaching Africa’s shores, we all know that it is coming–and its impact will be severe”, IMF Managing Director Dominique Strauss-Kahn warned at a conference in Tanzania in March. Without new actions, the global recession could take a humanitarian toll on the continent. After all, in Africa the crisis not only risks depressing growth and weakening government finances, but throwing millions back into poverty. The OECD African Economic Outlook 2009, due out in May, will reinforce these warnings by posting sharp downward revisions to growth projections compared with the 2008 report.

To be sure, Africa is less affected than some other regions by the current crisis, but it will be a challenge to maintain recent progress in areas like infrastructure investment and poverty reduction programmes, as well as governance and innovation. Aid is still a vital source of funds for these programmes.

Moreover, the economic crisis has also threatened progress towards the Millennium Development Goal of halving extreme poverty by 2015. In 2005, donors at the Gleneagles G8 and UN summits committed themselves to raising overall official development assistance by $50 billion in 2010 over 2004 figures, with $25 billion going to Africa. Donors seem committed. The latest OECD DAC aid figures show that bilateral development projects and programmes rose by 12.5% in real terms in 2008 compared to 2007, indicating that donors are substantially scaling up their core aid programmes. The largest donors in 2008, by volume, were the US, Germany, the UK, France and Japan. Just five countries exceeded the UN recommended target of 0.7% of gross national income: Denmark, Luxembourg, the Netherlands, Norway and Sweden. Ireland was expecting to join them in the next few years, though its own deep economic problems must now raise a question mark over the precise timing of that commitment.

A new survey of donors’ forward spending plans suggests an 11% increase in programmed aid between 2008 and 2010, including larger disbursements by some multilateral agencies. Debt relief may also increase slightly. However, even with the rise in 2008 and the projected increases to 2010, at least $10-15 billion must still be added to forward spending plans if donors are to meet their current 2010 commitments, and the shortfall is even greater against the 2005 target for Africa. For example, in 2008, ODA from Austria, Italy and Greece, excluding debt relief, was well under half their target for 2010. And while the crisis is fueling an even greater need for aid, not least as a counter-cyclical cushion against the slowdown, the global recession is shrinking the dollar value of ODA.

In short, aid must be accelerated as a political priority, not just to keep alive the hope of halving poverty by 2015, but to prevent the current crisis from doing serious damage to development prospects.

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